The aftermath of the EU referendum on the 24 June last year ended up highlighting one of the main differences between open-ended and closed-ended funds: liquidity.
When investors found out the UK had voted to leave the union, there was a run on open-ended property funds with daily dealing.
The problem is, property by its very nature is an illiquid asset so while investors were trying to pull their money out, management groups including Threadneedle, Aviva Investors, Standard Life Investments, M&G and Henderson suspended trading in their property funds.
Those invested in property investment trusts, also known as real estate investment trusts (Reits) did not suffer the same problems as investors in these vehicles can buy or sell their shares.
Annabel Brodie-Smith, communications director at the Association of Investment Companies (AIC), recalls: “Of course, share prices were adversely affected and discounts for the Property Direct – UK Sector widened out last summer but investors were able to sell their shares if they wanted to.
“Interestingly, sentiment changed quickly and property investment company discounts have narrowed significantly with the Property Direct – UK Sector now currently on an average premium of 3 per cent.”
Figure 1: Premium (discount) of AIC Property Direct - UK Sector
She adds: “Even in good times managers of open-ended property funds will need to retain a chunk of the fund in cash so they can meet redemptions.”
Many portfolio managers run portfolios which are available as an open-ended fund and an investment trust.
Pick and choose
According to Canaccord Genuity, there are 51 examples of open-ended funds and investment companies run by the same manager with a similar mandate.
But investors may favour one structure over the other for a number of reasons, and liquidity is one reason. The referendum was an example of investment trusts’ ability to invest in less liquid assets.
James Carthew, head of research at QuotedData, notes: “Closed-ended vehicles don’t have the same need to maintain liquidity to meet redemptions and so can go further down the market cap scale to invest in more illiquid assets.”
He explains how this works in practice: “Having two fund structures run by the same manager gives options for investors if there are capacity constraints on the open-ended fund.
“For example, the Fidelity Asian Values open-ended fund has just soft-closed, but the investment trust vehicle run by the same manager is still accessible. The closed-ended structure of Fidelity Asian Values Trust works to its advantage, as the manager is fishing towards the smaller end of the cap scale, searching for value opportunities where the market has not recognised their potential.”
“Open-ended funds satisfy investor demand by simply creating more units; conversely sellers are accommodated through the cancellation of units,” notes Dion di Miceli, head of investment companies at Gravis Capital Partners.